FINANCIAL MARKETS

Arvind Gajakosh
B.E. MBA. NET.

Topics covered


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Introduction of Financial Market Structure of Financial System Indian Financial System Regulatory authority structure Classification of Financial Markets
Capital Market Basics of Primary Market Basics of Secondary Market Money Market

INTRODUCTION

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Financial markets are the one in which buying or selling of financial assets take place. A financial asset is one which is used for production or further creation of assets. There is no specific place/location to indicate a financial market… Financial assets can be classified into two types 1) marketable assets-> shares, G-sec, Bonds, MF units 2) non-marketable assets-> Bank Depo, PO Certificates, PF.

STRUCTURE OF A FINANCIAL SYSTEM FUNDS DEPOSITS/SECURITIES FINANCIAL INSTITUTIONS CBs. MFs. Companies. Companies. etc FUNDS LOANS/SECURITIES SUPPLIERS OF FUNDS Individuals. Insurance Cos. Govts SECURITIES FUNDS FINANCIAL MARKETS SECURITIES Capital Market Money Market FUNDS . Govts FUNDS PRIVATE PLACEMENTS SECURITIES DEMANDERS OF FUNDS Individuals. NBFCs.

Banks Inv.Indian Financial System Indian financial system Fin. institutions Fin. services Banking institutions Cooperative banks Non banking institutions DFIs Dev. Banks Specialized institutions Money market Capital market Asset based Commercial banks NBFC Hire Purchase Leasing Call money Treasury bills Commercial papers Commercial bills CDs Primary market Fee based Secondary market Public sector Private sector Foreign banks . instruments Short term Medium term Long term Fin. markets Fin.

Regulatory authority GOI MOF(Fiscal policy) RBI(monetory) SEBI(CMR) IRDA (Insurance) Regulatory Supervisory .

maturity period>1yr) Equity: Debt i) Primary Market ii) Secondary Market Money market (ST.Classification of Financial Market          Organized market Capital market (LT.maturity period<=1yr) Unorganized market Money lenders Indigenous bankers .

BASICS OF PRIMARY MARKET Primary market Issues can be classified into 4-types. the issue is called as an Initial Public Offer. through an offer document.When an already listed company makes either a fresh issue of securities to the public or an offer for sale of existing shares to the public.  Initial Public Offer . . for the first time to the public. it is referred to as Follow on Offer (FPO).When an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both.  Follow on Offer .

as on a record date.  .A Preferential Issue is an issue of shares or of convertible securities by listed companies to a select group of persons u/s 81 of the Companies Act. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders. that is neither a rights issue nor a public issue. The issuer company has to comply with the Companies Act and the requirements of SEBI guidelines. which include pricing. disclosures in notice etc. 1956. The rights are normally offered in a particular ratio to the number of securities held prior to the issue.   Preferential Issue .BASICS OF PRIMARY MARKET  Rights Issue -When a listed company proposes to issue fresh securities to its existing shareholders. it is called as a rights issue.

INITIAL PUBLIC OFFER Various intermediaries in a public issue:  Lead managers / Book Running Lead Managers (BRLMs) Registrar to the issue    Underwriters to the issue Bankers to the Issue .

that it has made available all the information a potential investor needs to know and that the facts in the prospectus are correct.LEAD MANAGERS / BOOK RUNNING LEAD MANAGERS (BRLMS)  Lead managers also called merchant bankers and are in charge of the issue process.   . They have to ensure the company is following the rules laid down for an IPO. They act as intermediaries between the company and the investors. They are also responsible for drawing up the prospectus and marketing the issue.

in such cases. they are also called Book Running Lead Managers. the lead manager also helps to determine the price band. .LEAD MANAGERS / BOOK RUNNING LEAD MANAGERS (BRLMS)  If it is a book building process.

 Drawing up the list of allottees. crediting the shares to their demat accounts and ensuring refunds (if one is not allotted the shares.REGISTRAR TO THE ISSUE  This is a financial institution appointed to keep a record of the issue and ownership of company shares. . his/her money is returned within a month) is done by the Registrar to the Issue.

broker. merchant banker or a financial institution. They give a commitment to underwrite the issue.UNDERWRITERS TO THE ISSUE  These could be a banker.   . Underwriting means they will subscribe to the balance shares if all the shares offered at the IPO are not picked up.

. it is said to be issued at a Premium.When a security is sold above its face value. Issue at premium .When a security is sold at less than its face value. then it is said to be issued at Discount.) assigned to a security by the issuer.INITIAL PUBLIC OFFER SOME IMPORTANT CONCEPTS:  Face Value .   Issue at Discount .The nominal or stated amount (in Rs.

 As far as the IPO is concerned. .(QIBs)  Non-Institutional Investors. The final price is determined by market forces according to the demand for the issuing company’s shares. (NIIs)  Retail Investors. This range is called the price band. there are three categories of investors: Qualified Institutional Bidders.When the company and the BRLM fix a floor (Minimum) and cap price (maximum) for the issue.INITIAL PUBLIC OFFER  Book Building Process :. Investors are free to bid at any price in this range.

are permitted to bid for the shares. NRIs. societies and trusts whose application size in terms of value is more than Rs 1 lakh are allowed to bid. Resident Indian individuals. financial institutions such as Banks. Mutual funds.INITIAL PUBLIC OFFER  Qualified Institutional Bidders :.Under this head. Out of the 50% shares. HUFs. At least 15% of the total issue has to be reserved for NonInstitutional Investors. corporate bodies.  . Companies. 5% are reserved for Mutual Funds.Under this category. Insurance companies. A maximum of 50% of the issue can be kept reserved for investors falling under the QIB category. Non-Institutional Investors:. Foreign Institutional investors etc.

As a consequence of de-listing.Only Individuals. At least 35% of the issue has to be reserved for such investors. De-listing of securities:. The size in terms of value should not exceed Rs 1 lakh if one wants to apply under this category. both Resident and NRIs along with HUFs are allowed to bid.  .INITIAL PUBLIC OFFER  Retail Investors :.means permanent removal of securities of a listed company from a stock exchange. the securities of that company would no longer be traded at that stock exchange.

SEBI does not recommend any issue nor does take any responsibility either for the financial soundness of any scheme or the project for which the issue is proposed to be made or for the correctness of the statements made or opinions expressed in the offer document. SEBI mainly scrutinizes the issue for seeing that adequate disclosures are made by the issuing company in the prospectus or offer document.Role of SEBI in an IPO:   Any company making a public issue or a listed company making a rights issue of value of more than Rs 50 lakh is required to file a draft offer document with SEBI for its observations.  .

Offer document:. Abridged Prospectus:.Gives information about the issue and the company.INITIAL PUBLIC OFFER  Prospectus of a company:. It accompanies the application form of public issues.means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue which is filed with the Registrar of Companies (ROC) and Stock Exchanges (SEs).is a shorter version of the Prospectus and contains all the salient features of a Prospectus.   .

the details of credit to demat account /allotment advice and dispatch of refund order needs to be completed.  The Basis of Allotment should be completed within 15 days from the issue close date. Within 2 working days after completion of the basis of allotment. Listing of shares would take around 3 weeks after the closure of the issue.   .INITIAL PUBLIC OFFER As per SEBI guidelines:  The issue should remain open for a minimum of 3 days.

INITIAL PUBLIC OFFER As per SEBI guidelines:  The spread between the floor and the cap of the price band shall not be more than 20%. the bidding period shall be extended for a further period of 3 days. . subject to the total bidding period not exceeding 10 days.  In case the price band is revised.

  . stamp duty.INITIAL PUBLIC OFFER Some of the key benefits of investing in an IPO are:  Safer to invest as the scope for manipulation of price is smaller. All investors will get the shares at the same price. The investor does not have to pay any kind of brokerage or transaction fees or any tax such as service tax.

small investors hardly get any allotment in such a case. Money is locked for a long time and the shares are allotted after a few days where as in case of purchase from the secondary market the shares are credited within three working days. Thus. the shares are allotted in proportionate basis.INITIAL PUBLIC OFFER Some of the key drawbacks of investing in an IPO are:  In case of over subscription.  .

BASICS OF SECONDARY MARKET  The secondary market is where we purchase securities from the seller as opposed to the issuer of securities. The secondary market consists of buyers. Debt and Derivatives. The secondary market comprises of broad segments such as Equity. One on stock market in general and the other on individual applies two types    stocks. . SEBI circuit breakers. sellers and Intermediaries such as stockbrokers & others.

30 pm onwards Should a 15 percent rise/ fall in the Nifty/ Sensex occur Before 1 pm Trading continues Trading gets suspended for 2 hours Between 1 pm to 2 pm 2 pm onwards 1 hour Trading is stopped  In case of a 20 percent movement of the index (at whatever time). .30 pm Trading gets suspended for 1 hour 30 minutes 2. trading is halted for the rest of the day.MARKET CIRCUIT BREAKERS Should a 10 percent rise/ fall in the Nifty/ Sensex occur Before 1 pm Between 1 pm to 2.

5%. circuit filters / breakers are known as price bands or price filters.10% or 20% as applicable to different stocks are specified by the   stock exchanges. .STOCK CIRCUIT BREAKERS  When applied to individual stocks. Different circuit breakers of 2%. There are no circuits on the 30 stocks included in the Sensex or the 50 stocks included in the Nifty.

 The Money market is subdivided into four.  Commercial banks are main financial intermediary for money market. They are i) Call money market ii) Commercial bills market iii) Treasury bills market iv) Short term loan market  .MONEY MARKET Money market is a market for dealing with financial assets and securities which have a maturity of up to 1yr.

Interest rate varies from day to day and even hr to hr. Very sensitive to changes in demand & supply of call loans.Call money market     It is a market for extremely short period loans (1-14 days) Highly liquid in nature. .

he can get immediate payment by discounting the bill from any bank or FI. The seller need not wait until the due date of the bill. In credit sale. The buyer accepts such a bill promising to pay at a later date specified in the bill. .Commercial bills market     It is a market for BoE (Bills of Exchange) arising out of trade transaction. the seller draw a bill of exchange on the buyer. Instead.

Highly liquid in nature. or 182. Maturity period can be 91.Treasury bills market      It is a promissory note issued by the government. or 364days Regular/ordinary TBs (issued to CBs or Public) Ad-hoc TBs (issued to RBI) .

Commercial banks provide ST loans in the form of overdraft (business people) and cash credit (for industrialist). CC is given for a period of one year and it is sanctioned in a separate account. . OD is purely a temporary accommodation and it is given in the current account itself.Short term loan market     It is a market where short term loans are given to corporate customers for meeting their working capital requirements.

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